Topics: Supply and demand, Economic equilibrium, Partial equilibrium Pages: 6 (792 words) Published: October 18, 2012
COURSE: ECONOMICS
EXAMINATION: APRIL 2011

QUESTION 1
A) What is market equilibrium? With the aid of a diagram, explain how it is determined? (4marks)

Market equilibrium is a situation in which the supply curve of an item is exactly equal to its demand curve. Since there is neither surplus nor shortage in the market, price tends to remain stable in this situation. Price

D S
E
P

S
D

0 Q Quantity

Base on figure, the market equilibrium is labeled as point E. At this point, the market equilibrium price (P) and equilibrium quantity (Q) is determined.
The consumer and seller are willing to buy and sell the good at the same price and quantity.
At this point, the amount that the buyer want to buy is equal to the amount that seller want to sell.
When the market is in equilibrium, the forces of demand and supply are in balance, so there is no tendency for the price rise or fall, assuming all other things remind unchanged.

B) With the aid of a diagram, show the effect of an increase in demand for chicken in the domestic market. (4marks)

Price

D1S
D
P1E1
PE

D1
SD
0QQ1 Quantity

Base on the figure, the effect of an increase in demand for chicken in the domestic market are: 1. Suppose demand increases due to an increase in income, the demand curve shifts from DD to D1D1 2. Both equilibrium price and quantity will increase from P to P1 and Q to Q1 units. 3. The rise in price will result o movement along the supply curve (SS) and the original equilibrium at point E changes to a new one at E1.

C) Explain three (3) factors that may influence the supply of chicken in the domestic market. (6marks)

1. Price: The price of a product is one of the major factors that influence its supply in the market. There is a direct relationship between the two, which means that if the market price of a product is high there will be a tendency for its supply to increase. This is based on the principle that firms trade because they want to make maximum profit. The more they get for their goods the more revenue they earn because their marginal costs of production get covered.

2. Factors of production: Supply varies when there are changes in factors like land, labour, capital and enterprise, which are all used for production.

3. Government Legislation: Policies by the government to influence consumer tastes, reduce pollution or divert consumers to domestic products can affect supply of these products. This is done through increased taxes, higher interest rates or by giving subsidies. Whereas the former increase the production costs to the supplier, the latter provide financial assistance to the producer and encourage him to increase supply of a product

D) What happens to the price of chicken in the domestic market if our government issue more permits to import chicken? Draw a diagram to support your answer. (3marks)

P
P

S0
S

S
D
S1

D

P1
E1
E
P

P
E
E0
P0

S0

S

D
S
D
S1

0
Quantity

Q
Q0
Q
Q1
Quantity
0

Supply of
Chicken B

Supply of
Chicken A

* Base on the figure, if the government issue more permits to import chicken, this will create competitive between supplier. When the supply of a good increases, the supply for another good will decrease. Competitive supply usually refers to goods complete. * If the price of chicken A increases from SS to S1S1, the supply for chicken B will fall from SS to S0S0 assuming demand (DD) remains unchanged. * The price of chicken A will decreases from P to P0 but the quantity increases from Q to Q1 units. * Conversely, the price of chicken B will increase from P to P1, but the quantity will decreases from Q to Q0 units.

E) Explain any two (2) possible factors...